Featuring: Greece and Spain in Battle For The Bailouts

Just when you thought it may have dropped off the radar, we start the week with Europe beeping very loudly.

On Friday we casually mentioned that Spanish 10-year bond yields have moved back over 7%…but investors didn’t seem to care. They had ‘Europe fatigue’, which seems to mean you can just ignore something if you’re tired of it.

On Friday ,though, the fatigue wore off. Markets sat up and noticed the Spanish economy’s hopeless situation. Both 5 and 10-year government bond yields hit euro era highs on Friday, rising to 6.88% and 7.26% respectively. Financial markets are turning the credit tap off in Spain. Just as the eurocrats finally signed off on Spain’s €100 billion assistance package, agreed to at last month’s summit, the market is saying it’s nowhere near enough. A fully blown European bailout beckons.

The trigger for the latest euro spasm was a request from the region of Valencia for central Spanish government assistance. So Spain’s government is now having to bailout its busted banks AND busted regional governments.

Concerned that Spain is again getting all the bailout attention, Greece reminded us over the weekend that it’s still in the picture. From Bloomberg:

‘Greece retakes its position at the heart of the European debt crisis this week as its creditors assess how far off course the country is from bailout targets, raising again the specter of its exit from the euro.

‘Greece’s troika of international creditors the European Commission, the European Central Bank and the International Monetary Fund will arrive in Athens tomorrow amid doubts the country will meet its commitments and reluctance among euro-area states to put up more funds should it fail.

‘”If Greece doesn’t fulfill those conditions, then there can be no more payments,” German Vice Chancellor Philipp Roesler told broadcaster ARD yesterday, adding that he is “very skeptical” Greece can be rescued and that the prospect of its exit from the monetary union “has long ago lost its terror.”‘

We thought we’d read this article a few months ago. But it’s definitely dated 22 July and the Troika are making another visit to Greece this week. So get ready for another week of huff and puff from the Troika and bluff from the Greeks. It should be quite a spectacle.

It’s certainly shattered the nice little rally that equity markets had been enjoying lately. Or maybe it was just a short covering rally after all. When traders ‘cover their shorts’, they buy back stocks they had previously borrowed and sold. This gives the impression of buying demand. But it’s a short term boost and just reflects previously bearish traders reducing those bets. Once they’re done, the market is left to find its own direction again. Enter Europe.


Greg Canavan
for Markets and Money

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Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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